Clarification to This Article
This article about the impact of the recession on state finances between 2008 and 2009 included a D.C. revenue figure that is not directly comparable to the Maryland and Virginia numbers cited. As the article said, the Census Bureau reported that revenue fell 28.4 percent in Virginia and 15.9 percent in Maryland from fiscal 2008 to fiscal 2009, and the District said that its revenue fell 5.2 percent. The two states' figures include losses in pension investments. Because of a 1997 federal takeover of some D.C. pension liabilities, the city's investment performance is not comparable.

Sept. 15 (Bloomberg) -- U.S. state pensions such as Illinois, Kansas and New Jersey are in a "death spiral," with assets at many insufficient to cover benefits, payouts consuming a growing portion of resources and costs rising twice as fast as investment gains. Bloomberg's Monica Bertran reports. (Source: Bloomberg)

The severe drop in revenue resulted largely from the big investment losses experienced by state pension funds during the worst period of the downturn. Also, the report said, tax revenue slipped while surging demand from newly needy citizens drained the funds that back unemployment benefits, publicly funded health care and workers' compensation.

Overall, total state government revenue dropped 30.8 percent, to $1.1 trillion, between fiscal 2008 and 2009, according to the report.

The economy has improved since the depths of the recession as the stock market has rebounded and states' tax revenue has begun to tick upward. Still, the recession's lingering effects - particularly a national unemployment rate that is hovering at close to 10 percent - have left the vast majority of states with large budget deficits and increasing service demands.

Governors and state legislators across the country are now confronted with a series of painful choices about future service cuts and tax increases.

Next year "will actually be the most difficult budget year for states ever," said Nicholas Johnson, director of the state fiscal project at the Center on Budget and Policy Priorities. "If you look at the gap between the cost of providing public services and the revenue available to provide them, it remains very large," he added.

States' continued fiscal problems are projected to be a drag on the broader economic recovery as state payrolls are likely to shrink and state contracts to private companies are likely to be pared back.

Despite billions in emergency aid from the federal government through various stimulus programs, 46 states had to raise taxes and make cuts to close a combined gap of $130 billion in their current budgets, according to the Center for Budget and Policy Priorities. Moreover, 40 states already have projected budget gaps totaling $113 billion for next year, according to the center.

At the same time, states are grappling with swollen social service caseloads, underfunded pension funds and flat revenue - a situation that will worsen as federal stimulus aid comes to a halt in the coming months.

Future federal help is considered highly unlikely, as Congress and President Obama have put a greater emphasis on reducing spending and trimming the huge federal budget deficit.

The new census report adds to the bleak portrait that has emerged from other studies documenting the damage caused by the economic downturn, while making plain that states are likely to continue struggling fiscally for years.

"This report paints a fairly compelling picture of the impact of the recession on states," said Susan K. Urahn, managing director of the Pew Center on the States. "There are many states predicting that they're not going to return to pre-recession levels of revenue until 2014."